Determining the Cost of VA Care

[Pages:34]Determining the Cost of VA Care with the Average Cost Method for the 1993-1997 Fiscal Years

Paul G. Barnett, PhD, Shuo Chen, PhD,

and Todd H. Wagner, PhD October 3, 2000

VA Health Economics Resource Center Working Paper #1

The support of the VA Health Services Research and Development Service and the VA Cooperative Studies Program is gratefully acknowledged. We also wish to acknowledge the contribution of John H. Rodgers, MA, to the early stages of this project.

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Determining the Cost of VA Care with the Average Cost Method for the 1993-1997 Fiscal Years

Table of Contents 1. Overview..................................................................................................................3 2. Cost Distribution Report ..........................................................................................4 3. Overview of Merger of Cost and Utilization Databases ..........................................9 4. Unit Cost of Outpatient Care .................................................................................13 5. VA Inpatient Databases .........................................................................................18 6. Daily Cost of Mental Health, Rehabilitation and Long-Term Care Stays ............25 7. Cost of Acute Hospital Care Stays.........................................................................26 8. References..............................................................................................................34

Tables 1. Cost Distribution Accounts in the Cost Distribution Report, Inpatient Services 2. Cost Distribution Accounts in the Cost Distribution Report, Outpatient Services 3. Excluded Facilities 4. Facility Consolidations and the Year of their Occurrence 5. Categories of Outpatient Care 6. Median Facility Cost per Clinic Stop Visited 7. Categories of Inpatient Care 8. Median Facility Cost per Day of Stay for Mental Health, Rehabilitation, Long Term Care,

and Other Inpatient Care

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1. Overview The U.S. Department of Veterans Affairs (VA) provides health care to veterans at some 150 medical centers. VA does not routinely bill patients for their care. As result, VA economics researchers have not had billing data to estimate the cost of health care encounters. This working paper describes a method of estimating the cost of health care encounters using centralized VA cost and utilization data bases and relative value units obtained from non-VA databases. We used VA cost and utilization data to estimate the cost of VA patient care encounters. Our estimates are based on the cost of patient care departments reported in the VA Cost Distribution Report (CDR) and the detailed utilization data reported in the Patient Treatment File (PTF) and the Outpatient Care File (OPC). This document describes methods we used for the federal fiscal years ending in 1993 through 1997.1 We have called this the "average cost" method, as it assumes that every health care encounter has the average cost of all encounters that share its same characteristics. While this assumption limits the accuracy of the cost estimates, this method is the only available method of generating a comprehensive set of encounter-level estimates of all patient care provided by VA prior to the 1998 fiscal year. This average cost method relied on the following assumptions: To find the cost of outpatient visits, we found the average cost per clinic location that was visited for each of 12 different types of outpatient care. We assumed that all visits within each category have the same cost. To find the cost of long-term, rehabilitation, and psychiatric hospital stays, we found the average cost of a day of stay, and applied it to estimate the cost of care. This makes the assumption that every day of stay has the same cost, that is, that costs are proportionate to the length of stay.

1. The federal fiscal year begins on October 1 and ends on September 30 of the following year. We follow the convention of referring to a federal fiscal year (FY) by the year it ends, thus FY97 represents the period October 1, 1996 to September 30, 1997.

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 To find the cost of acute hospital care, we used relative value units (RVUs) from the nonVA sector. These RVUs are the Diagnosis Related Group (DRG) weights used by the Health Care Financing Administration to reimburse U.S. hospitals for the care they provide to Medicare patients. The RVUs reflect the effect of diagnosis on the relative quantity of resources used in a hospital stay. We used these RVUs so that our cost estimates would reflect the effect of diagnosis on resource use. The method we employed makes the following assumptions: (1) that the non-VA relative value units, the Medicare DRG weights, reflect the relative costs of VA hospital stays, (2) that all stays with the same characteristics have the same cost, (3) that costs are exactly proportional to the DRG weight when the length of stay is equal to the mean for that DRG, (4) and that when a stay is different from the mean, the difference in length of stay has a constant proportional effect on costs. This paper begins with a description of the VA Cost Distribution Report (CDR), our

source of cost information. It then provides an overview of our method of combining the CDR with the VA utilization files.

Section 4 describes how these data were used to estimate the unit costs for outpatient care. Section 5 describes VA inpatient databases, and how we tabulated them to find the costs of hospital stays. Section 6 describes our method of determining the daily cost of mental health, rehabilitation, and long-term care stays. The final section of this working paper describes our method of finding the cost of acute hospital stays.

The paper includes comments to indicate our plans for improvements in the costing method that we plan to adopt for FY98 and subsequent fiscal years.

2. Cost Distribution Report The Cost Distribution Report (CDR), also called report RCS 10-0141, is routinely prepared by all VA medical centers. The CDR represents an estimate of the costs expended by each VA patient care department. VA expenditures are recorded in its general ledger, the Financial Management System

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(FMS). The FMS system tracks expenditures by cost center, a budget entity which corresponds to a VA service. Examples of VA cost-centers are Medical and Plant Operations. Cost centers do not correspond to a specific patient care department.

The CDR is created by distributing costs reported in the FMS cost centers to the "cost distribution accounts" (CDA) of the CDR. The CDAs include patient care departments, such as Medical Intensive Care, or Medical Ambulatory Care. CDAs also include indirect cost departments.

The distribution of costs is based on estimates prepared by the service chiefs in each medical center. They estimate the amount of time staff spend on different activities. The cost of staff time, as reported in FMS, is then assigned to each CDA. At the end of each fiscal year, a cumulative CDR is prepared, and it is reconciled to the costs reported in FMS.

Table 1 lists the inpatient cost distribution accounts in the CDR, Table 2 lists the outpatient cost distribution accounts. (There are additional cost accounts, such as cost of contract providers, home care programs, and benefits, which are not included in either table).

Table 1 Cost Distribution Accounts (CDAs) in the Cost Distribution Report

Inpatient Services

DEPARTMENT GENERAL MEDICINE NEUROLOGY REHABILITATION EPILEPSY CENTER BLIND REHAB SPINAL CORD INJ MED INT CARE UNIT INPATIENT DIALYSIS INPATIENT AIDS GEM UNIT - MED BEDS PRIMARY CARE ? MED SURGICAL WARD COST SURG INTENSIVE UNITS OPERATING ROOM SUITE OPEN HEART SURGERY PRIMARY CARE ? SURG

COST DISTRIBUTION ACCOUNT

DIRECT COST INDIRECT COST

1110

1111

1113

1114

1115

1116

1100

1117

1118

1119

1120

1130

1210

1211

1212

1200

1213

1230

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Table 1 (continued)

PSYCHIATRIC WD COST GEN INTERMEDIATE PSY S/A INTERMED CARE S/A TREAT PROG ? HI SPEC INPAT PTSD UNIT EVAL/BRIEF TRMT PTSD STAR I, II & III S/A STAR I, II & III GEM UNIT - PSYCH BED PRIMARY CARE ? PSYCH NURSING HOME OVERHEAD VA NURSING HOME CARE GEM UNIT - NH BEDS DOMICILIARY BED SECT DOM SUBSTANCE ABUSE PTSD RESID REHAB DOM GEM UNIT - DOM BEDS INTERMEDIATE CARE GEM UNIT - INT BEDS PRRTP PRRP SARRTP HCMI CWT/TR SA CWT/TR GENERAL CWT/TR

1310 1311 1312 1313 1314 1315 1316 1317 1320 1330 1400 1410 1420 1510 1511 1512 1520 1610 1620 1711 1712 1713 1714 1715 1717

1300

1400 1500 1600 1700

Tables 1 and 2 also explain the correspondence between direct and indirect costs in the CDR. The middle column lists the direct costs CDAs. These represent costs directly attributed to patient CDAs, such as the cost of physician services, nursing staff, laboratory services, supplies, etc. The right column provides the indirect CDAs. The CDR does not distribute these indirect costs to each department; however, they are only distributed to a group of departments. Although there are more than 40 direct cost accounts, there are just 7 corresponding indirect cost accounts. There is just one indirect CDA to correspond to the 31 direct CDAs for outpatient care.

Each of these indirect CDA accounts include as many as eleven different types of indirect costs, each distinguished by numbers to the right of the decimal place. The types of indirect costs include education (.11, .12, .13, .14), research (.21 and .22), administrative support (.30),

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building management (.40), engineering (.50), equipment depreciation (.70), building depreciation (.80). Thus the indirect cost account "medical research support" for medical bed section is designated as 1100.21, and includes the costs of medical research associated with the eleven CDAs numbered between 1100 and 1118. We used the CDR detail file as our source of data, as it includes indirect cost CDAs for equipment and building depreciation that are not included in the CDR jurisdictional file.

Table 2 Cost Distribution Accounts in the Cost Distribution Report

Outpatient Services

DEPARTMENT MEDICINE - SOC ADMITTING/SCREENING HIV/AIDS OP CLINICS OP PRIMARY CARE MED SYRGERY - CBC AMB OPERATING ROOM OP PRIM CARE SURG SPEC PSYCH - SOC GEN PSYCH - SOC HCHV/HMI SOC PTSD CLINICAL TEAM PSYSOCIAL-GRP SOC PSYSOC-IND SOC SUBSTANCE ABUSE (OP) SUBSTANCE USE DISORD HUD/VASH SOC COMMUNITY OUTREACH OP PRIM CARE SPT SOC OP PRIM CARE GEN SOC DIALYSIS - SOC CANCER TREATMENT ADULT DAY HLTH CARE ANCILLARY SVC - SOC REHAB-SUPT SVCS DIAGNOSTIC SVC - SOC PHARMACY - SOC PROSTHETICS/ORTHOT SCI SUBS ABUSE OP DENTAL PROCEDURES DOM AFTERCARE - VA TELEPHONE CONTACTS

DIRECT COST 2110 2111 2119 2130 2210 2211 2230 2310 2311 2312 2313 2314 2315 2316 2317 2318 2319 2330 2331 2410 2420 2510 2610 2611 2612 2613 2614 2616 2710 2750 2780

INDIRECT COST 2800

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Distribution of Indirect Costs. Our average cost estimate required information about each CDA, including its share of indirect costs. The CDR distributes indirect costs only to groups of patient care departments, but we needed to distribute them to each CDA. We assigned indirect costs to each CDA in proportion to its share of the total direct costs of its group of CDAs. For example, the indirect cost of the inpatient mental health bed sections was distributed to the component departments of psychiatry, substance abuse, and PTSD according to each CDA's share of their total direct cost. At a facility where the psychiatry CDA had 55% of the direct cost in the group of inpatient mental health CDAs, we assigned 55% of the indirect cost to psychiatry.

We considered using quantity of utilization as the basis to allocate indirect costs. This would have required us to assume that indirect costs are incurred in proportion to the quantity of service provided, such as the number of inpatient days or the number of clinic visits. We decided that this assumption was unwarranted, as services are heterogeneous. For example, since some clinic visits have much greater direct cost, it is not reasonable to assume that they use the same indirect cost. We are unaware of any available data to distribute VA indirect costs on another basis, e.g., to distribute facility maintenance costs based on square footage of space.

CDR Units and Unit Costs. We did not use the units of service or the unit costs reported in the CDR because of our lack of confidence in the accuracy of these data. Utilization is sometimes excluded. This occurs when a cost distribution account has no cost; any utilitization in the corresponding bed section or clinic stop is not included in the CDR. Costs are sometimes excluded from the calculation of unit costs. This occurs when the CDR reports costs but has no matching utilization, since unit costs would otherwise be a "divide by zero" error, the computer program that creates the CDR calculates the unit costs for that department to be zero; in this way, the cost is effectively dropped from consideration. Instead, we used the VA discharge (the Patient Treatment File) and ambulatory care data bases (the Outpatient Care File) as our source of utilization data in order to find the per unit cost of services.

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